In an article on 31 March 2006, we discussed understanding the totality of costs and charging the right things. This article continues the discussion of costing.

The Corporation does not account for all costs and does not charge known costs to the right entity

We noted two big questions concerning our conventional methods of costing, such as cost accounting and activity based costing:

1. Are we gathering all of our costs?
2. Are we charging our costs to the right things?

The first question; Are we gathering all of our costs? Here we have two problems:

1. We are incurring many “unknown costs”, costs that we don’t measure and capture
2. We don’t have one entity that defines our costs, so we have to cost various entities that we can think of or “known costs”

Today, virtually every enterprise has “intangible assets”. As we have said before, these intangible assets really are unmanaged capital that we utilize in our performance. So we spend a lot of time and money capturing known costs of tangible assets and neglect the even more important unknown costs of intangible assets.

We spend our effort costing separate entities like assets, employees, supplies, payables, etc. This haphazard approach does not have a baseline to define all of the costs we incur, and allows us to skip costs that we do not understand.

The corporation does not manage the capital that is consumed to generate costs

We said in the article that costs are incurred through the consumption of capital in performance. So the only thing we should cost is capital consumed in performance. If we are consuming capital, we need to document and manage all the capital that is consumed, like processes, people, information, and equipment. Capital is utilized in performance through our performance solutions. So we should measure costs by solution.

The problem is that we have never defined our performance solutions. If we precisely identify and define our performance solutions, we will have one entity that defines our costs and we will include all of our tangible and intangible assets.

So, when we define our performance solutions properly and measure the costs of developing, operating, supporting, and utilizing our solutions, we can answer our first question.

The corporation charges known costs to centers, activities, objects, etc, but are these produced by the costs

The second question; Are we charging our costs to the right things? Here we have two problems

1. We have contrived many costing methods and charge costs to many entities, but they have never provided the right answer
2. We don’t have one entity that describes what we produce with the costs we incur, so we charge to various entities that we can think of

We have many conventional methods of cost accounting. We cost processes, activities, stations, products, centers, and other entities. But, are these the proper entities to charge for our performance costs? To answer this question we should do some simple thinking that we have never done. In the article, we asked; what do these performance costs produce? And then we said; once we understand this then we can understand the totality of our costs and begin charging our costs to the right thing.

When we consume capital in performance, we incur costs. We do not perform for the sake of performing; we perform to produce results or outputs from our performance. Therefore, we should charge our performance costs to the results we produce.

The corporation does not manage results, so it cannot charge costs against the value created

Now we face the second problem. We have never defined the results that we must produce for the success of our enterprise. This has been a serious problem since the very start of business. The results we produce contain our quality and value. We define material, products, sales, revenues, and profits as separate entities that we manage on their own, but we have never defined the results produced across the enterprise as one set. If we define our results properly, we will have a baseline for all the entities that incur costs and produce value.

So, when we define all our results and identify all the performance solutions utilized to produce the results, we can answer our second question.

The corporation needs Result-performance Management to manage performance costs and result value-added

We need to charge all performance costs to the results produced. This is another reason to redefine your enterprise to utilize capital in performance to produce value in results.

Result-performance Management is a breakthrough method to manage performance costs against result value. This we call Result-performance Costing. Join the R-pM community and download the informative presentation “Organize your Business with R-pM”.

21^st Century Management eliminates 20^th century problems

Result-performance Management (R-pM) eliminates costing problems and other costly 20^th century problems. Slash costs, simplify business management, and boost competitive advantage through R-pM, the conventional method for 21^st Century Management.

Download your 21^st Century Management Manual today

Your 21^st Century Management Manual, The R-pM Toolkit, is available today and is under continual development to expand and refine 21^st Century Management. The R-pM Toolkit is offered at a nominal price to encourage wide use of R-pM. Get your R-pM Toolkit, and future updates, at result-performance-management.com.

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This entry was posted on Tuesday, July 11th, 2006 at 01:44 and is filed under:
Forums: Administration and Capital Management, Processes and Information Systems, Business Change Methods, Strategy and Performance Management
Topics: Conventional Management Methods, Cost Management, Quality Management, Value Management
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